Chapter 2 Flashcards
List six reasons why the state might intervene in a country’s economy by providing benefits. [1.5]
June 2020; Q2 (i)
- Redistribution
- Market failures
- Efficiency
- Inertia
- External pressure
- Moral hazard and vested interests
The government of Parthia wishes to encourage savings through employer-sponsored pension
funds. They currently offer no incentives to do so.
i. Explain what a behavioural incentive is, why it may be preferable to a traditional tax
incentive and provide an example other than automatic enrolment.
[2.5]
ASSA J2020; Q7(i)
ASSA J2020; Q7(i)
Behavioural incentives use principles of behavioural theory rather than financial incentives to encourage an outcome. [1]
It is preferable because:
* It can be simpler to implement and understand ✓✓
* Higher Participation Rates ✓
* It is typically cheaper ✓
* It works better ✓. For instance, defaults and nudges can help overcome procrastination or inertia✓, which are common barriers to beneficial behavior✓.
Example: changes to default options, nudges or reminders ✓✓
Define the term “consumption smoothing”. [1]
Consumption smoothing is about ensuring adequate access✓ to goods and services✓ as needed, including the ability to withstand shocks✓, such as health crises✓.
List reasons why a person may be unable to support themselves through working and earning a wage. [2]
Temporary sickness or injury ✓✓ Permanent disability ✓
Unemployment ✓
Too young to work ✓
Studying ✓
Caring for children or relatives ✓
Old age ✓
What are the two main tools individuals can use to smooth consumption, and provide an example of each. [4]
The first is by pooling their risks with others.✓✓ A classic critical illness (CI) policy✓✓ can be regarded as a vehicle facilitating pooling, where each insured individual pays premiums into the pool✓, and those who experience a critical illness event receive payments from the pool✓.
The second tool is through saving✓✓, where individuals reduce their consumption in good times✓, and save up resources✓ to ensure that their consumption does not need to fall too drastically when times are bad✓. A classic retirement fund✓✓ can be regarded as a savings vehicle, facilitating asset-based reallocations✓✓ that shift resources from periods when individuals can still work✓ to when they can no longer work due to old age✓.
When is pooling more efficient? [1.5]
In general, pooling is a more efficient way of smoothing consumption when:
* the probability of adverse experience is small✓✓ and
* the correlations between the risks occurring to individuals are low✓✓.
If the probability of adverse experience is large, or the correlation of risks across individuals is high, then pooling becomes less efficient than saving.✓✓
List the three main reasons for saving. [0.75]
- Consumption smoothing
- Precautionary saving
- Bequest motives
Define the term “Primary Care”. [3.5]
Primary care health professionals act as a first point of consultation✓ for all patients✓. Such a professional would usually be one of the following:
* A primary care physician✓, such as a general practitioner or family physician✓
* A licensed, independent allied healthcare provider✓, such as a physiotherapist, respiratory therapist, occupational therapist, speech therapist, or dietician.✓✓
* A non-physician primary care provider✓, or mid-level provider✓, such as a physician assistant or nurse practitioner.✓
Primary care health providers see a wide range of cases✓ and provide generalist care✓, typically in an out-patient setting✓. Depending on the nature of the health condition, patients may then be referred for higher levels of care.✓
Primary care is typically comprehensive✓ and includes preventative care✓ and chronic disease management✓.
Define the term “Secondary Care”. [3]
Secondary care refers to the healthcare services provided by medical specialists✓ and other health professionals✓, for example, cardiologists, urologists, and dermatologists✓✓✓. It includes acute care and skilled attendance during childbirth, intensive care, and medical imaging services.✓✓✓✓
Secondary care may be provided in or out of hospital.✓✓ In some countries, patients may be required to see a primary care provider for a referral before they can access secondary care,✓✓ while in others self-referral is possible.✓
Define the term “Tertiary Care”. [3.5]
Tertiary care is specialised consultative healthcare✓✓, usually on an in-patient basis✓ and referral from a primary or secondary health professional✓✓, in a facility that has personnel and facilities✓✓ for advanced medical investigation and treatment✓✓, such as a tertiary referral hospital or academic hospital✓✓. Examples of tertiary care services are cancer management, neurosurgery, cardiac surgery, plastic surgery, treatment for severe burns, advanced neonatology services, palliative care, and other complex medical and surgical interventions.✓✓✓✓
Define the term “quaternary care”. [0.5]
Quaternary facilities deal with very rare cases and experimental treatments.
Describe the locations in which the different levels of HC servives are provided. [2]
Primary healthcare is usually available at local community level✓, so that people do not have to travel far✓ to have their basic healthcare needs met.
Secondary facilities tend to be found in urban areas only✓.
Tertiary facilities may only be found in major metropolitan areas✓ where they may be linked to a medical school✓. Even in a major metropolitan area there might be only one or two facilities✓.
Quaternary facilities are centres of excellence✓; therefore, there may be only one quaternary facility in a country✓, or on an entire continent✓, that specialises in a condition✓.
Describe the factors which will determine how much an individual will need to fund their consumption in retirement. [6]
- The individual’s steady-state consumption level✓✓. Individuals who have become used to a certain standard of living may find it difficult to adjust to a lower consumption level after they have retired✓.
- How consumption patterns are likely to change as people get older✓✓.
- The uncertainty in consumption streams✓✓. Some payments—such as daily expenses✓—are certain while others—such as major medical expenses✓—are less predictable. These unpredictable payments can be made more predictable by using insurance✓, or through public provision of services✓, such as healthcare and long-term care✓.
Healthcare plans, may not cover all costs✓. Planning for out-of-pocket medical expenses is critical✓. - Investment Returns✓: The performance of your investments will impact how much you need to save. A higher return on investments can reduce the amount you need to save✓, while lower returns might increase it✓.
- Debt and Financial Obligations✓: Any remaining debt, such as mortgages or loans, and other financial obligations, such as supporting family members✓, will affect how much you need to save for retirement.
- Housing Costs✓: Whether you own your home outright or have a mortgage, housing costs (including property taxes, maintenance, and utilities)✓✓ need to be considered. Some may also plan to downsize or relocate to reduce these expenses✓✓.
- The timing of these payments✓. This involves predicting an individual’s retirement age✓, their expected lifespan✓, and the needs of their dependants✓.
- Once these expected cashflows have been estimated✓, they can be discounted✓ to calculate a present value of the accumulation required at retirement to fund consumption in retirement✓.
List the different behavioural biases.[2.5]
- Myopia ✓
- Loss aversion or prospect theory ✓✓
- Sunk cost fallacy ✓
- Hyperbolic discounting ✓
- The availability heuristic ✓
- Hindsight bias and law of small numbers ✓✓
- Framing effects ✓
- Complexity avoidance ✓
- Inertia ✓
List the main providers of healthcare. [2]
- Doctors ✓
- Nurses ✓
- Support medical personnel and clinical associates✓✓ (also known as allied health providers)✓
- Hospitals ✓
- Upstream service providers✓
- Pharmaceutical manufacturers✓
- Medicine distributers✓
- Suppliers of medical equipment✓
Identify the behavioural bias evident in the following behaviour:
i) A person prioritises take home pay over retirement income.
ii) The decrease in utility due to a loss is far greater than the increase in utility arising from a gain of the same value.
iii) People prioritise death benefits because they over-estimate their mortality rates.
iv) When there are too many choices, people opt for the default or make no decision at all.
v) People react differently to two pieces of communication depending on how the material is presented.
vi) Members do not increase their retirement fund contribution rates even when they can afford to do so, preferring to put it off. [2.25]
i) Myopia✓, caused by high subjective discount rates✓
ii) Loss aversion✓
iii) The availability heuristic✓
iv) Complexity avoidance✓
v) Framing✓
vi) Procrastination✓, caused by time-inconsistent✓ (potentially hyperbolic) subjective discount rates✓
List the factors that the cashflow needs in retirement should take into account. [1.5]
- Consumption and expenditure ✓
- Savings in retirement ✓
- Tax in retirement ✓
- Income versus lump sums ✓
- Retirement age versus retirement stage ✓
- Life expectancy at retirement ✓
Describe the consumption and expenditure cashflows during retirement. [1.5]
Expenditure✓ on daily cost of living✓, leisure✓, and healthcare costs✓ tend to increase at higher ages✓ and are subject to greater inflation risk✓.
Describe the Public sector healthcare services. [2]
Public sector healthcare services are generally subsidised✓ or offered for free at point of service✓ by the state✓.
Demand is usually high✓ and, as a result, public healthcare is often associated with poor service✓ and quality✓.
There is a large disparity in the perception of expertise and efficiencies between the private and public sectors✓✓, despite the existence of centres of excellence in the public sector✓.
State three advantages of private healthcare providers. [1.75]
Private healthcare providers alleviate pressure✓ from the burdened public sector✓ and provide facilities and services✓ that the public sector may struggle to provide due to competing priorities✓.
Increased competition✓ can lead to cheaper prices✓ and increased innovation✓.
Describe the social systems of social protection and social security. [2.5]
Social protection, such as healthcare and education✓✓, reduces vulnerability to risks✓ and adverse life events✓.
Social security focuses on benefits relating to unemployment✓, disability✓, old age✓, and other circumstances that lead to loss of income or economic hardship✓✓.
These systems are designed to smooth consumption✓ and provide a mechanism for redistribution✓.
List the criteria to evaluate social systems.[1]
Social systems are evaluated based on their adequacy, sustainability, and robustness.✓✓✓
Sustainability is particularly important.✓
Describe insurance intermediaries as a distribution channel. [1.5]
These are independent of any particular health and care insurance company.✓✓
They can advise their clients on the best contracts for their needs from among all the contracts available.✓✓
They may be remunerated by commission from the insurance companies whose products they sell or by fees from their clients.✓✓
Describe tied agents as a distribution channel. [2]
These are insurance intermediaries who offer the products of only one or a limited number of insurance companies.✓✓
If the tie is to more than one company, then usually the product ranges of the companies are mutually exclusive.✓✓
Typically, tied agents are financial institutions such as banks or building societies.✓✓
Tied agents are paid commission by the companies whose products they sell.✓✓
Own salesforce
l These are usually employees of a health and care insurance company and so only sell the products of that company.
l They may be paid by salary or commission or a mixture of the two. Direct marketing
The main forms of direct marketing are: l Telephone selling
l Press advertising l Mail shots
l Internet sales.
l Telephone selling might involve ‘cold-calling’ by the company … l … Or might be in response to an advertisement (in which case press advertising and telephone selling are part of the same process).
l Press advertising might include an application form or invite requests for further information.
l Mail shots will definitely include application forms. l Internet selling may be linked to advertising, and is essentially web-based application processing.
(Maximum 6) ii)
l Either insurance intermediaries or the company’s own salesforce (or perhaps particular employees of the company) will carry this out.
l An employer allows access to the work force (through meetings or literature) … l … For the purpose of marketing products to the employees on an individual basis.
Own salesforce
l These are usually employees of a health and care insurance company and so only sell the products of that company.
l They may be paid by salary or commission or a mixture of the two. Direct marketing
The main forms of direct marketing are: l Telephone selling
l Press advertising l Mail shots
l Internet sales.
l Telephone selling might involve ‘cold-calling’ by the company … l … Or might be in response to an advertisement (in which case press advertising and telephone selling are part of the same process).
l Press advertising might include an application form or invite requests for further information.
l Mail shots will definitely include application forms. l Internet selling may be linked to advertising, and is essentially web-based application processing.
(Maximum 6) ii)
l Either insurance intermediaries or the company’s own salesforce (or perhaps particular employees of the company) will carry this out.
l An employer allows access to the work force (through meetings or literature) … l … For the purpose of marketing products to the employees on an individual basis.
List the factors affecting an individual’s actual retirement age.
Personal factors, such as health and family circumstances l Financial circumstances, especially eligibility for state and company-provided pension benefits, and the incentives to work or retire at different ages provided by these
l Employer or industry-related factors, for example, skills shortages l The wages earned by continuing to work l The relative value to the individual of continued work and greater leisure l Physical requirements of the job l Normal retirement age l Other country-specific factors, especially social practices
Why do you think:
i) Singles and lower-income individuals have a higher required income replacement ratio than wealthier people and couples?
Chapter solution 6 i)
Single people have higher fixed expenses that they need to meet from their one income. These fixed expenses rarely reduce in retirement, so a higher proportion of the income required remains the same before and after retirement. Similarly, poor people have less flexibility over their expenses because most of their salary goes towards essentials which cannot be cut. This means that they are less able to tolerate a reduction in income after retirement.
Why do you think:
ii) Gross of tax income replacement ratios are generally lower than the equivalent net-of-tax income replacement ratios?
ii) Marginal tax rates are lower at lower income levels. As replacement ratios are typically less than 100%, this means that the tax bill after retirement will be lower than the tax bill before retirement. Adding tax back to both the denominator and numerator in the replacement ratio will reduce the ratio.
There may be many reasons for this. Changes in taxation and interest rates influence how individuals smooth consumption and can change significantly over time. Other reasons include unrealistic expectations, changing cultural trends and consumption patterns, as well as the person moderating their expectations as they realise that the original target is not feasible.
Why do you think:
iii) Someone in their 50s may have a lower target income replacement ratio than they did in their 30s?
There may be many reasons for this. Changes in taxation and interest rates influence how individuals smooth consumption and can change significantly over time. Other reasons include unrealistic expectations, changing cultural trends and consumption patterns, as well as the person moderating their expectations as they realise that the original target is not feasible.
Strategies to Counteract Hyperbolic Discounting
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Give me exam questions on basic chain ladder models
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Sure! Here are some exam questions on basic chain ladder models:
- Basic Concepts
Question: Explain the fundamental concept behind the chain ladder method in actuarial science. What is the primary purpose of using this method?
- Calculation of Development Factors
Question: Given the following development triangle of claims, calculate the development factors for each development period.
Accident YearDevelopment Year 1Development Year 2Development Year 3201910001500180020201200160020211300
- Estimation of Outstanding Claims
Question: Using the development factors calculated in Question 2, estimate the outstanding claims for the 2020 accident year.
- Chain Ladder Assumptions
Question: List and explain three key assumptions of the chain ladder model.
- Application of the Chain Ladder Method
Question: Describe the steps involved in applying the chain ladder method to forecast future claims. Provide an example to illustrate the process.
- Interpretation of Results
Question: After applying the chain ladder method, you obtain the following projected claims amounts for the next development year: 2020 = $1700, 2021 = $1400. How would you interpret these results, and what factors might you consider when analyzing these projections?
- Criticisms and Limitations
Question: Discuss two main criticisms or limitations of the chain ladder method in claims reserving.
- Practical Considerations
Question: How would you address a situation where the historical data shows significant variability or irregular patterns that do not fit well with the assumptions of the chain ladder model?
Feel free to adjust the complexity of the questions based on the level of the exam or the depth of understanding required.
Give me actuarial exam questions on which factors to consider when deciding whether or not to include a particular condition on a CI policy
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Certainly! Here are some actuarial exam questions focusing on the factors to consider when deciding whether to include a particular condition in a Critical Illness (CI) insurance policy:
- Underwriting Risk
Question: When evaluating whether to include a specific medical condition in a Critical Illness (CI) policy, what underwriting risk factors should be considered? Explain how these factors might influence the decision.
- Impact on Premiums
Question: How does the inclusion of a high-risk medical condition in a Critical Illness policy typically affect the pricing and premium calculations? Discuss the actuarial considerations involved.
- Claims Experience
Question: Describe how historical claims experience and data analysis influence the decision to include or exclude a particular condition in a CI policy. What type of data is most relevant?
- Policyholder Demographics
Question: What role do the demographics of the target policyholder population play in deciding whether to include a particular medical condition in a CI policy? Provide examples of demographic factors that might be considered.
- Regulatory and Legal Considerations
Question: What regulatory or legal considerations should be taken into account when deciding to include or exclude a condition from a Critical Illness policy? How do these considerations impact the decision-making process?
- Competitor Offerings
Question: How might the offerings of competitor CI policies influence an insurer’s decision to include or exclude certain conditions in their own policy? Discuss the implications for market competitiveness.
- Policyholder Needs and Expectations
Question: Why is it important to consider policyholder needs and expectations when deciding whether to include a particular condition in a Critical Illness policy? How can insurers balance these needs with the associated risks?
- Reinsurance Considerations
Question: Explain how reinsurance arrangements might impact the decision to include or exclude a specific condition in a CI policy. What factors related to reinsurance should be considered?
These questions cover various aspects of decision-making in including conditions in Critical Illness policies, from underwriting and pricing to regulatory and market factors.
Actuarial Science. Give me exam questions on behaviourial biases in respect of savings for retirement.
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Certainly! Here are some exam questions related to behavioral biases and their impact on savings for retirement:
- Definition and Examples
Question: Define “behavioral bias” in the context of retirement savings. Provide two examples of behavioral biases that commonly affect individuals’ retirement saving behaviors and explain how each can impact retirement outcomes.
- Present Bias
Question: Explain the concept of present bias and its effect on retirement savings. How might present bias lead to under-saving for retirement, and what strategies could be employed to mitigate this issue?
- Loss Aversion
Question: Discuss the role of loss aversion in retirement savings decisions. How might loss aversion lead to suboptimal saving behaviors, and what are some potential solutions or strategies to counteract its effects?
- Mental Accounting
Question: What is mental accounting, and how does it influence individuals’ approach to saving for retirement? Provide an example of how mental accounting might lead to inefficient saving strategies.
- Overconfidence Bias
Question: Describe the impact of overconfidence bias on retirement planning. How might overconfidence in one’s ability to predict future financial needs or investment performance affect retirement savings?
- Procrastination
Question: How does procrastination manifest in the context of retirement savings, and what are some behavioral interventions that can help individuals overcome procrastination and increase their retirement savings?
- Anchoring
Question: Define anchoring and describe how it might affect retirement savings decisions. Provide an example of how anchoring can influence an individual’s savings behavior and suggest ways to address this bias.
- Default Options and Nudge Theory
Question: Explain how default options in retirement savings plans (e.g., automatic enrollment) leverage behavioral insights to improve savings outcomes. Discuss the effectiveness of such nudges and potential limitations.
- Hyperbolic Discounting
Question: What is hyperbolic discounting, and how does it affect individuals’ saving behavior for retirement? Discuss strategies that can be used to counteract the effects of hyperbolic discounting.
- Impact of Financial Education
Question: Evaluate the role of financial education in mitigating behavioral biases related to retirement savings. How effective is financial education in addressing biases like optimism bias or framing effects?
These questions cover a range of behavioral biases and their implications for retirement savings, aiming to test understanding of both theoretical concepts and practical strategies for improving saving behaviors.
What is hyperbolic discounting, and how does it affect individuals’ saving behavior for retirement? Discuss strategies that can be used to counteract the effects of hyperbolic discounting.
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What is Hyperbolic Discounting?
Hyperbolic discounting is a behavioral economics concept that describes how people tend to prefer smaller, more immediate rewards over larger, delayed ones. Unlike exponential discounting, which assumes a consistent rate of discount over time, hyperbolic discounting implies that individuals have a stronger preference for rewards in the near term and are less patient as the delay to receiving the reward increases.
Impact on Saving Behavior for Retirement
Short-Term Focus: Individuals may prioritize immediate gratification, such as spending money on current consumption, rather than saving for long-term goals like retirement. This short-term focus can lead to insufficient retirement savings.
Procrastination: The tendency to discount future benefits more heavily means people might keep delaying saving for retirement, thinking they will start saving more seriously later on, but often never do.
Inconsistent Saving Patterns: Hyperbolic discounting can lead to erratic saving behaviors. Individuals might plan to increase their savings in the future but find themselves falling back into the habit of spending more in the present.
Automatic Enrollment and Contributions: Implementing automatic enrollment in retirement savings plans with automatic increases in contribution rates can help ensure that people save more consistently. This strategy takes advantage of inertia, making it easier for individuals to save without having to make active decisions each time.
Commitment Devices: Encourage individuals to use commitment devices, such as setting up automatic transfers to retirement accounts or using financial tools that lock in savings commitments. These devices help people stick to their savings goals by making it harder to access the funds prematurely.
Short-Term Incentives: Providing immediate rewards or incentives for saving can help balance the preference for immediate gratification. For example, offering matching contributions or tax benefits that provide short-term gains can make saving more attractive.
Simplified Decision-Making: Simplify retirement planning by providing easy-to-understand information and default options that require minimal decision-making. This reduces the cognitive load and helps individuals make better saving choices.
Financial Education and Planning Tools: Educate individuals about the long-term benefits of saving and use retirement planning tools to illustrate the impact of different saving behaviors over time. Tools that show projections of future savings and retirement outcomes can make the future benefits of saving more tangible.
Behavioral Nudges: Use behavioral nudges to prompt better saving habits. For instance, reminders about the benefits of saving, periodic check-ins, and goal-setting can help reinforce saving behavior.
By understanding and addressing hyperbolic discounting, individuals and policymakers can design more effective strategies to promote better saving habits and improve retirement preparedness.
Definition of a Commitment Device
In behavioral economics, a commitment device is a tool or strategy that individuals use to lock themselves into a course of action that they believe will help them achieve long-term goals. These devices are designed to counteract tendencies toward procrastination and short-term thinking by creating constraints or incentives that promote adherence to pre-established plans or objectives.
The primary purpose of a commitment device is to help individuals overcome common behavioral biases such as present bias (the tendency to favor immediate rewards over long-term benefits) and procrastination. By making the cost of deviating from a plan higher or the benefits of sticking to the plan more tangible, commitment devices encourage individuals to make choices that align with their long-term goals.
Discuss the role of brokers in the distribution of health and care insurance products. How do brokers typically assist consumers in selecting insurance products, and what are the potential benefits and drawbacks of using brokers?
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Discuss the role of brokers in the distribution of health and care insurance products. How do brokers typically assist consumers in selecting insurance products, and what are the potential benefits and drawbacks of using brokers?
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Brokers play a crucial role in the distribution of health and care insurance products by acting as intermediaries between consumers and insurance companies. Their primary functions and the benefits and drawbacks of using them are outlined below:
Role of Brokers
Product Knowledge: Brokers are knowledgeable about a wide range of insurance products and providers. They can help consumers understand complex policy details, coverage options, and terms.
Personalized Advice: Brokers assess consumers’ individual needs and financial situations to recommend suitable insurance plans. They tailor their advice based on the specific requirements of the consumer.
Comparison Shopping: Brokers can compare different insurance products from multiple insurers. This allows consumers to see a variety of options and find the best value for their needs.
Application Assistance: They help with the application process, ensuring that forms are completed accurately and submitted correctly.
Claims Support: Brokers can assist consumers with claims processes, helping to navigate any issues and providing guidance on how to effectively file a claim.
Ongoing Service: Brokers often provide ongoing support, including policy reviews and updates, to ensure that the insurance remains appropriate as consumers’ needs change.
Benefits of Using Brokers
Expert Guidance: Brokers offer professional advice and can simplify the complex choices involved in health and care insurance.
Time Savings: They handle the legwork of researching and comparing different insurance options, saving consumers time and effort.
Access to a Range of Products: Brokers typically have access to multiple insurance providers and can offer products that consumers might not find on their own.
Potential Cost Savings: By comparing various plans and providers, brokers can help consumers find competitive pricing and potentially better coverage options.
Advocacy: Brokers can advocate on behalf of consumers, especially if there are issues with policy coverage or claims.
Drawbacks of Using Brokers
Potential Conflicts of Interest: Brokers may be incentivized by commissions or fees from insurance companies, which could influence their recommendations. It’s important to ensure they are acting in the consumer’s best interest.
Cost: Some brokers charge fees for their services, which can be an additional cost for consumers. However, many brokers are compensated by the insurance companies, so there may be no direct cost to the consumer.
Quality Variation: The quality of brokers can vary significantly. Some may be more knowledgeable and professional than others, impacting the level of service and advice provided.
Limited Product Range: While brokers have access to many products, they may not have access to every plan available in the market, potentially limiting the range of options.
In summary, brokers can be valuable in navigating the complex world of health and care insurance by providing expert advice, personalized service, and helping to find the best options. However, consumers should be aware of potential conflicts of interest and ensure they are working with reputable brokers to maximize the benefits of their services.
However, what goes into each category is determined by whether: l The participation is mandatory or voluntary. l The benefits are funded from contributions or from other sources. l The benefits are provided by the state, private organisations, or individuals. l The benefits are financial or non-financial in nature
F108 J2021 Q2(i)
F108 J2021 Q4(i)
F108 N2020 Q4(i)
